1. Itemized Deductions Tax Computation
Form 1040 Sch A
Pub 4012 Tab F
Pub Page 201
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2. Deductions May claim larger of
Standard deduction
Increased if > 65 or blind
-OR-
Itemized deductions
If itemized deductions are entered, TaxWise will select better option
Refer participants to Pub 4012 – Page F-1 for standard deduction amounts
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3. Intake/Interview
Verify there is taxable income (Form 1040, Line 43) after standard deduction before itemizing
Does federal return impact state return?
Normal standard deduction may take taxable income to zero – if so, no need to itemize
State standard deduction may be less and itemizing might be better
Taxpayers who have a standard deduction of zero should generally itemize their deductions. Taxpayers who normally fall within this category are:
Married, filing a separate return, and their spouse is itemizing
Filing a return for a short tax year due to a change in the annual accounting period
Considered to be nonresident aliens or dual status aliens during the year (and not married to a U. S. citizen or resident at the end of the tax year)
NTTC Training – 2013

4. Possible Itemized Deductions
Pub 4012 F-3
Medical Expenses, Taxes and Interest paid by taxpayer
Gifts to Charity
Casualty and Theft Losses – Out of Scope
Job Expenses and Other Items
Miscellaneous Expenses
Sch A Itemized deductions are divided into the listed categories
Casualty and theft losses are out of scope for Tax-Aide
Preparer should organize TP's Deduction documents in this order before beginning Sch A.
ASK TP if there are any other expenses for each category as you organize the paperwork.
Keep the TP involved in what you are doing or you may miss something!
You do not have to total the TP expenses. In the interview, if you find this is the case, ask one of them (if a couple) to sit at a table and create a total for each section.
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5. Schedule A
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6. Medical Expenses Medical expenses include
Diagnosis, cure, mitigation, treatment, or prevention of disease
Treatments affecting any part or function of body
Equipment, supplies, and diagnostic devices
Premiums for insurance that covers medical care
Long-term care insurance premiums (limited)
Transportation/travel to get medical care
NTTC Training – 2013

7. Medical Expenses Not all “medical expenses” qualify
Examples of not qualified expenses:
Cosmetic surgery
Funeral or burial expenses
Nonprescription drugs (except insulin)
Weight loss program not prescribed
Diet food
Pub 17 Table 21-1
NTTC Training – 2013

8. Medical Expenses Must be paid by taxpayer Must be paid during tax year
Cannot be reimbursed expenses including expenses claimed for HSA
Must be paid during tax year
Only for taxpayer, spouse, dependents or individuals that would have been dependent except for gross income or filing situation
24¢/mile for travel for medical purposes
Expenses paid this year regardless of when services were provided
If you and your spouse live in a noncommunity property state and file separate returns, each of you can include only the medical expenses each actually paid
You can include medical expenses you paid for your spouse if you were married either at the time your spouse received the medical service or at the time you paid the medical expenses
You can include medical expenses for your child even if you are the noncustodial parent
Hint: use the qualifying child/relative tri-fold chart to see if medical expenses qualify
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9. Medical Expenses in TaxWise
Entered on A Detail worksheet under Sch A
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10. TaxWise carries to Sch A Detail wkt No need to input again
Emphasize
Medicare insurance charges are input on Wkt 1 with social security benefits
TaxWise carries to Sch A Detail wkt
No need to input again
Self-employed insurances (line 29 on Form 1040) are out of scope
Taxpayer should prepare a summary of expenses
General descriptions as shown are sufficient
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11. Medical Deduction Quiz
Deductible medical expense? Prescription sunglasses Contact lenses Dentist teeth whitening Gym fee (doctor suggested exercise) Dentist teeth cleaning
Yes
Yes No No
Yes
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12. Taxes MUST be imposed on taxpayer MUST be paid by taxpayer
MUST be paid in current tax year
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13. Taxes State and local taxes Real estate tax
Income tax OR
General sales tax
Real estate tax
Personal property tax based on value
Foreign income tax (if not claiming a credit)
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14. TaxWise Sch A Taxes Section
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15. State and Local Taxes – Line 5
Income taxes
Withheld (W-2, 1099-R, etc.)
F/S Tax Paid worksheet for state estimate and prior year payments
Other local income tax payments? OR
General sales taxes
Sales Tax worksheet in TaxWise
Clarify for your state
State income tax
City or county or other local income tax
Other items such as state disability, which in some states is an income tax withheld from paychecks
If taxpayer adds up actual sales taxes paid during 2013
And amount is more than the table amount
May deduct actual sales tax amount
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16. Interview If Sales Tax is an option – any large purchases?
Motor vehicle (car, motorcycle, motor home, off-road vehicle, etc.)
Boat or airplane
Home, home addition or renovation
Sales tax must have been separately stated and paid by taxpayer (not the contractor)
Sch A instructions list all the large purchase items
Sales tax on large purchases may be added to the sales table amount
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17. Sales Tax Worksheet For Sales Tax worksheet:
Part 1 automatically calculated by TW
Part 2 – enter State abbreviation and check next boxes as applicable
Part 2, Line 8 – enter sales tax paid for any specified (large) purchases
Clarify for participants if your districts will default the state code and rate
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18. TaxWise does automatically
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19. Sales Tax Worksheet Add general sales tax on large purchases on line 8
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20. Deductible Taxes Line 6 – Real Estate (Property) Taxes
May be reported by mortgage company on Form 1098
Not for business
Not for
Benefit to property
Itemized charges for services (such as trash pickup or sewer fees)
Transfer taxes (or stamp taxes)
Rent increases due to higher real estate taxes
Homeowners' association charges
Taxes for local benefits
Tend to improve the property and increase its value
Often, “special assessments” for streets, sidewalks, lights or curbs
Taxes for the maintenance, repair, or interest charges related to those local benefits are deductible real estate taxes
Must be able to show the amount of that part to claim the deduction
Increase the basis of the property by the amount of the assessment
If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible
Foreign real property taxes are also deductible
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21. Other Deductible Taxes
Line 7 – Personal Property Taxes based on value of personal property only
If based on weight and value, only value portion is deductible (boat, vehicles, RVs, etc.)
Line 8 – Other Taxes
Foreign income taxes, if credit not claimed on 1040 line 47
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22. Deductible Taxes Main home Other realty e.g. car Foreign income tax
Emphasize
Don’t use the other real estate lines (out of scope)
Don’t use business vehicle worksheet
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23. Non-Deductible Taxes Federal income and excise taxes
Pub 17, Table 22-1
Federal income and excise taxes
Social Security, Medicare
Federal Unemployment (FUTA)
Railroad retirement taxes (RRTA)
Customs duties
Federal estate and gift taxes
Per capita tax
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24. Home Mortgage Interest
Interest on loan secured by main home or second home
Mortgage to buy or build home or second mortgage (both limited)
Home equity loan or line of credit (limited)
Both taxpayer and lender must intend that loan be repaid
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25. Home Mortgage Interest Deductibility
Mortgages taken out before October 14, – fully deductible, no limit
Mortgages after October 13, 1987, to buy, build, or improve home
Limited to $1,000,000 total debt (this plus pre-10/14/87 ) ($500,000 MFS)
Note: lender late charges are deductible as interest if interest on underlying loan is qualified
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26. Home Mortgage Interest Deductibility
Post October 13, 1987, not to buy, build, or improve home limited to
Debt of $100,000 ($50,000 MFS) and
Total debt on home does not exceed fair market value of home
$1,000,000 and $100,000 limits apply to combined mortgages on main home and second home
Emphasize
Only main and second homes
Not third homes
Can select a different second home each year
Main home is always the principal residence
NTTC Training – 2013

27. Home Mortgage Interest
Points
Paid at loan origination
If to buy or build main home, deductible in full
Otherwise, spread over life of loan
Points must be interest equivalents
If to pay for appraisal or other fees, not interest and not deductible
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28. Home Mortgage Interest
Examples
Deduct points on purchase, loan #1
Refinance #1 – points are spread over life of new loan (#2)
Refinance #2 – remaining points on loan #2 can be deducted when loan #2 is paid off; points on Refinance #2 (loan #3) are spread over life of loan #3
Points must be interest equivalents
If to pay for appraisal or other fees, not interest and not deductible
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29. Home Mortgage Interest
Qualified home mortgage insurance premium (called PMI)
Must relate to home acquisition debt
Insurance contract issued after 2006
Sometimes not reported on Form 1098
Emphasize
Need to ask probing questions
Look at prior year’s return
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30. Interest Home Mortgage Line 14 – Investment interest – out of scope
Pub 17 fig 23A & 23B
Home Mortgage
Line 10 – Interest/Points from Form 1098
Line 11 – Interest if not on Form 1098
Line 12 – Points not on Form 1098
Line 13 – Qualified mortgage Insurance premium
Line 14 – Investment interest – out of scope
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31. Deductible Interest Expense
Interest and points on 1098
Interest not on 1098
Points not on 1098
PMI
If home mortgage interest is paid to an individual, need to show payee’s information including their SSN or ITIN
Do not use the first two items in #10 – out of scope
NTTC Training – 2013

32. Non-Deductible Personal interest Service charges
Annual fees for credit cards
Loan fees
Credit investigation fees
Interest to purchase or carry tax-exempt securities
Fines and penalties paid to a government for violations of law
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33. Schedule A (cont)
Out of scope
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34. Gifts to Charity Qualified charity
Churches, governments, schools, etc.
Approved by IRS
U.S. charity
irs.gov/charities for list
Public charity [501(c)(3)] – 50% limit
Private foundations – 20% or 30% limit
Donations to individuals (e.g. homeless) are not deductible
Caution – Some foreign charities may not be qualified by the IRS
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35. Gifts to Charity Monetary contribution less than $250
Bank record (check, credit card or bank statement) or receipt
-OR-
Written acknowledgement from charity
If payment is >$75, charity must state value of goods/services provided, if any
Taxpayer should have a receipt/evidence for all donations
“Cash” contributions not allowable without a receipt
Documentation requirements are provided for training
Can rely on taxpayer’s representations if in line with due diligence, e.g. good faith reliance
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36. Gifts to Charity Monetary contribution $250 or more
Written acknowledgement from charity
Must state value of goods or services provided in exchange for contribution, if any
e.g., fundraising dinner – value of dinner must be deducted from ticket price paid; only net amount is deductible
Charities must report the value of goods or services whenever any are provided and the “donation” is $75 or more
Charity may disregard value of token items, e.g. coffee mug, pen
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37. Gifts to Charity Housing foreign exchange student
May deduct up to $50 per month
Foster child unreimbursed expenses
Pub 17, Chapter 24
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38. Gifts to Charity Donations of clothing or household items
Deduct fair market value
Usually thrift store value
Good used condition or better
Capital gain or business property donations – out of scope
Car, boat, or plane donations – out of scope
Capital gain property
If the gain on sale would be a capital gain
A.k.a. appreciated property
Business property
If ever depreciated, donation is out of scope
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39. Gifts to Charity Out-of-pocket expenses are also deductible
14¢
Tolls and parking
Out of pocket expenses when serving as volunteer for qualified charity (e.g., hospital volunteer uniform)
Need written acknowledgement from charity if any single item is >$250
Informational
Mileage rate is set in the law, IRS cannot adjust it
Large item example
Buy airplane ticket to attend charity’s event as guest speaker
Charity should give written acknowledgement of speaker’s participation at the event and that they provided their own airfare
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40. Gifts to Charity – Limits
Total may not exceed 50% of AGI
Sort by cash (monetary) or other-than- cash
If total is over 20% of AGI, sort by organization limit (see Pub 526)
If exceed any limit, refer to paid preparer
Note: gifts of property that increased in value – out of scope
Most charities Tax-Aide sees are 501(c)(3) charities
All 501(c)(3) charities are 50% charities
If any limit is reached, return is out of scope
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41. Gifts to Charity – Limits
5-year carryover of amounts in excess of limit
Review prior year’s return
Input on Sch A line 18
Most charities Tax-Aide sees are 501(c)(3) charities
All 501(c)(3) charities are 50% charities
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42. Sch A – A Detail Worksheet – Monetary Gift
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43. Other Than Cash – A Detail Worksheet
If need Form 8283, either link from A Detail worksheet or “Add” the form
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44. Non-Cash Contributions
Need receipt for all non-cash contributions
Single non-cash gifts $250 or more
Written acknowledgement from charity
Enter on A Detail worksheet
If the value of any one item is over $500, must provide additional information
Date acquired
How acquired
Donor’s cost or basis
NTTC Training – 2013

45. Non-Cash Contributions (cont)
More than $500
Complete Form 8283 – Section A, Part 1 only
In-Scope up to $5,000 total
More than $5,000 – Out-of-Scope
Taxpayer should always keep detailed list of items donated (pictures can help)
If the value of any one item is over $500, must provide additional information
Date acquired
How acquired
Donor’s cost or basis
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46. Non-Cash Deductions (cont)
Generally report by donation date, specify date
Taxpayer provides fair market value and other needed information
Preparer completes form
Emphasize
Donations of appreciated property are out of scope
Example: securities, artwork
If depreciated, then taxpayer should sell, take the capital loss and donate the proceeds
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47. Form 8283, Page 1, Section A Form 1098-C is Out of Scope
Note – must properly fill in complete address to avoid diagnostic error
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48. A, B, C, D are charitable organizations listed on Part I of this page
Form 8283, Page 1 (cont)
A, B, C, D are charitable organizations listed on Part I of this page
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49. Non-Deductible Contributions
Contributions to following types of organizations:
Business organizations such as Chamber of Commerce
Civic leagues and associations
Political organizations and candidates
Social clubs
Foreign organizations
Homeowners’ associations
Communist organizations
Contributions to Chamber of Commerce not deductible, but dues may be a business expense
NTTC Training – 2013

50. Non-Deductible Contributions
Cost of raffle, bingo, or lottery tickets
Tuition
Value of person’s time or service
Donated blood
Direct contributions to an individual
Part of contribution that benefits taxpayer
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51. Miscellaneous Deductions
Pub 17 Chapter 26
Subject to 2% of AGI threshold
Line 21 – Unreimbursed employee expenses
Uniforms, union dues, repayment of wages <$3,000, etc.
Military certification if Form 2106 required
Line 22 – Tax preparation fees
Line 23 – Other expenses
e.g., investment fees, safe deposit box (if holds investments), IRA trustee fee (if paid from outside funds), other repayments of income <$3,000
Clarify
Form 2106 is required for unreimbursed
Mileage or travel
Entertainment
Business gifts
Special rules apply for performing artists – out of scope
Other expenses
To produce or collect income
Investments management fees
Investment training – but not on cruise ships
Manage or maintain income-producing property
Safe deposit box holding securities
IRA trustee fee when paid outside of IRA – if paid within IRA, not deductible
To determine, contest, pay or claim a refund of any tax
Credit card service fee when paying tax by credit card
Work related education
Perhaps not eligible for Lifetime Learning credit
Repayments of <$3,000
E.g. unemployment benefits
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52. Misc Business Expenses
Link from Line 21 to new Business Exp Line 21 schedule if need to list
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53. Miscellaneous Other
Link from Line 23 to new Misc Deducts Line 23 schedule if need to list
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54. Miscellaneous Not Subject to 2%
Gambling losses to extent of winnings
Unrecovered investment in annuity
Certain work-related expenses for disabled
Repayments >$3,000 under claim of right
Certain Ponzi scheme losses
Certain casualties – out of scope
Informational
To claim gambling losses
Need to keep a diary of winnings and losses
Generally, use a “per session” determination of whether a gain or loss (not “per bet”)
Example of work-related expenses for a disabled person
Attendant enabling employment of disabled
Repayments would be of prior year included income that believed was theirs
Such as unemployment benefits or wages
Repayments of <$3,000 are subject to the 2% haircut
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55. Misc Deductions Not Subject to 2%
Link from Line 28 to new Other Deducts Line 28 schedule if need to list
Reminder
For gambling losses, easier to enter on any W-2G
If manually entering on Line 28, need to limit to the extent of winnings
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56. Deductions – Special Rule
Married filing separately
If one spouse itemized deductions
The other spouse MUST itemize
Standard deduction not allowed
Does not apply if eligible for Head of Household status
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57. Deductible Expense? Merrill Lynch management fee Yes
For taxable portfolio
For IRA portfolio, deducted from IRA
Steel toed shoes for construction worker
“Nice” office clothes
Cost of losing church bingo cards
Yes No
Yes
Investment management fees
Must be paid by the taxpayer (not the IRA trust)
Work tools or specialized clothing can be deducted
Must not be “street” clothes – generally usable
The price paid is deemed equal to the value received for charity raffles, bingo, or other games of chance
No net deduction No No
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58. Quality Review
Review with taxpayer to ensure all deductions considered
Review taxpayer’s documents to ensure all deductions are entered in TaxWise
Compare to prior year’s deductions
Review Schedule A – as expected?
Any state adjustments needed?
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59. Summary with Taxpayer Explain why itemizing does or does not help
Explain thresholds
Medical expense 10% versus old 7.5%
Misc expenses 2%
Remind of need to keep records and receipts
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60. Tax Calculation
Adjusted Gross Income (AGI) minus (Standard or Itemized) Deduction minus Exemptions EQUALS Taxable Income
Tax liability determined by:
Tax tables using income and filing status, Sch D Tax Worksheet or other special methods with certain types of income
TaxWise calculates all automatically
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61. Form 1040 – Page 2
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62. Itemized Deductions
Questions?
Comments?
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63. Let’s Practice Under guidance of your Instructor
Reopen Kent/Bryant return
Enter Itemized Deductions from Pub 4491W Page 68
Verify refund monitor
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